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Quest Means Business

Bond Yields: The Italian Tipping Point; Berlusconi To Step Down; Italy on the Edge; Europe in Crisis; Energy Outlook; Interview with Alan Mulally; U.S. Markets Plunge

Aired November 09, 2011 - 14:00   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

BECKY ANDERSON, CNN INTERNATIONAL HOST: Italy at tipping point. Borrowing costs reach unsustainable levels.

MAX FOSTER, CNN INTERNATIONAL HOST: Political paralysis in the face of enormous financial challenges. Greece awaits news of its interim government.

I'm Max Foster in London.

ANDERSON: And I'm Becky Anderson in Rome. This is QUEST MEANS BUSINESS.

A very good evening from Rome. We are live, here, tonight.

Italy without a government, without an economic plan, and some say, without hope. But there are chinks of light here this evening, in the past couple of hours. What we do now is that Silvio Berlusconi will leave power. He will step down as prime minister within days. He will leave as soon as parliament finally approves a set of austerity measures. Now media reports are saying that could happen as soon as Saturday.

After that, the president, Giorgio Napolitano says a new government will be formed or fresh elections will be held. Mr. Berlusconi will not be a candidate but as the political turmoil rumbles on the economic pressure is getting greater and greater.

FOSTER: It happened to Greece, it happened to Ireland and Portugal, now it is happening to Italy. Bond yields topped 7 percent, putting Europe's third largest economy a step closer towards economic disaster.

Let's take a look at how things are standing right now. The yields on Italian 10-year bond hit around and a half percent, another new record. That puts it in some unfashionable company. Greece, Ireland and Portugal all saw their yields hit this level, before finally taking a bailout. It seems even Silvio Berlusconi's promise to resign as prime minister hasn't been enough to stop those yields from rising. Italian fear is already spreading across the Atlantic. The Dow is already below 12,000 points. Every share in it is in the red. Banks are seeing the heaviest losses. Inevitably because of the links to those European banks. And uh -- those European banks, and the losses, linked to Greece and Italy.

Alison is actually at the New York Stock Exchange for us right now.

Alison, just take us through the concern there about the impact, the knock on the impact.

ALISON KOSIK, CNN BUSINESS CORRESPONDENT: Yes, and Italy is really the focus here today on Wall Street and the selling has really picked up in the past few minutes with the Dow plunging 364 points.

Investors, Max, are nervous about Italy's future and how Italy could impact the global economy. And you know, there is a sense here that Berlusconi's resignation is just going to wind up causing a whole new set of problems. So while it is good that he's stepping down, one analyst actually says that investors are aware that a quick change in leadership won't immediately fix all of the country's problems. And that means you are going to see the instability and uncertainty continue to weigh on the markets, Max.

FOSTER: Alison, thank you. Now it was just as miserable a day, really, for the European markets, particularly in the Eurozone countries. Italian shares actually started the day in positive territory, would you believe. Once we saw the yields shoot up. The worst performer was the media company, MediaSat. It fell more than 12 percent. Its top shareholder is none other than Mr. Silvio Berlusconi.

On the DAX it was German banks who faired the worst. And Commerz Bank was down more than 6 percent.

Alliance, Becky, down more than 5 percent, bit numbers.

ANDERSON: Yes, and understandable, really. We have been waiting, haven't we, Max, all week within trepidation to see whether these bond yields, the borrowing costs on Italian bonds, reach this threshold of 7 percent. In fact, of course, they did earlier on this trading session. Now that they have I asked Professor Pietro Reichlin, of LUISS University, here in Rome, what he thought happens next and where he thought Italy goes from here. Have a listen to this.

(BEGIN VIDEOTAPE)

PIETRO REICHLIN, ECONOMICS PROFESSOR, LUISS UNIVERSITY: My impression that there is a lot of uncertainty about what is going to be next. So there are basically two options, either we go immediately to elections. And then, because of the electoral system in Italy it is not clear that there is going to be a clear majority after the elections. Second possibility is that there is going to be a technical government, with a large majority. But this is not what Berlusconi wants. So there is going to be a lot of opposition to this type of solution, that I think would be best for to calm down the markets.

ANDERSON: Is the economy on the brink?

REICHLIN: You know, sometimes there is some kind of self-fulfilling prophecy, no? Because Italy will not be in bad shape if interest rates stay low enough. So, the fact that the spread is going up, right now, is basically due to this political uncertainty, and also some kind of, you know, expectation that the whole European monetary system can collapse, that it is not sustainable, in general. But this is not the fault of (INAUDIBLE) in a sense. No, it is the fault of the general situation.

The Italian economy is not like the Greece economy. We have a strong manufacturing sector and Italian firms are seen as (INAUDIBLE), even though there is some uncertainty that is coming from the overall featuring in Europe, huh? OK, whether there is going to be a strong recovery or not? And the Italian banks are a bit, you know, in a bad shape, because they are loaded with Italian treasury bills.

ANDERSON: Does it need to stay in the euro? Should it stay in the euro?

REICHLIN: In the short term this very much depends on the ability of the European institutions, and especially, the European Central Bank to intervene, to make clear to the markets that the central bank is ready to buy the troubled assets, in the market. Or maybe the International Monetary Fund to give some credit to Italy, you know --

ANDERSON: Berlusconi didn't ask for any money, though, did he? He didn't go cap in hand. He didn't ask the IMF for any cash, effectively. He just said he was willing to have the IMF scrutinize what was going on.

REICHLIN: Yes, this was -- you know, Becky, I think a political move, you know, to show that he is the one that can do the reforms. And the opposition cannot. Which I think is not true. I think that, at the moment, the fact that Berlusconi stepped down is a good thing.

(END VIDEOTAPE)

ANDERSON: All right. And the IMF expected here in Italy sometime soon. The European inspectors will be in by the weekend. And you will hear more from Professor Reichlin as we move through the show. I asked him what his five-point plan for the future of Italy. It will be interesting. Stick with us and you will hear that. So when the bond yields of other troubled countries hit 7 percent of course, they hit the bailout button. So will Italy hit the bailout fund button at this point. Let's find out more, shall we?

Bill Gross is the founder and managing director of PIMCO; he's one of the biggest bond traders in the world. So, who better to talk to tonight, than him? He is at the firm's headquarters in California.

Bill, when you heard what the situation was in Italy, yesterday; i.e., the prime minister was going to resign, but we didn't know when, and we didn't know how. And we didn't know whether there was going to be an election, or a coalition government. Were you surprised this morning when the bond market opened lower and yields shot through the roof?

BILL GROSS, FOUNDER & MANAGING DIRECTOR, PIMCO: I don't think so, Becky. I mean, Italy, and Euroland, itself, remain at crisis of politics, as well as finance. And it is a dysfunctional family where policy and action, which you speak to, and policy delayed, they flush investors to safer markets, such as U.S. Treasuries.

And now with yields at 7 percent, plus, in Italy it is simply not solvent in the long-term. It doesn't mean it is going to go bankrupt tomorrow, but a country that can only grow at 1 or 2 percent in terms of nominal growth, you know, cannot afford to pay 7 percent, plus, in their bond market over a longer term basis. And so private markets and private sellers have appeared.

ANDERSON: Bill, let's face it. It was chaotic here yesterday, it has been frankly, chaotic in Italy for some time. The markets wanted to see the backside of Silvio Berlusconi. I can tell you tonight, and in the last couple of hours, you've had a lot of movement here since the bond markets in Europe closed. I can tell you tonight that we do now know that the vote on the austerity measures will go through the senate this weekend, hoping to return it to the chamber by Sunday. And we ought to see the resignation of Silvio Berlusconi, fairly quickly.

So, given that the window if closing on Silvio Berlusconi's leadership reign here, should we now -- should we, now see these bond markets selling out -- yield-wise, and coming down and bond prices going higher, again tomorrow.

GROSS: Oh, Becky, I don't think that has much to do with it. You know, we expect an austerity package to be voted in perhaps tomorrow, or over the weekend, as you mentioned. But basically the problem is who is going to buy these bonds? You know, the market has basically looked forward to the ECB in terms of their purchasing power. We saw that today with 2 billion to 2.5 billion of purchasing of Italian bonds. But it didn't seem to have much effect. You know the markets in turn look towards a potential bailout from the IMF, or from the EFSF. You know, from other agencies basically, that will provide you know, hundreds of billions of dollars going forward.

You know, the Italian bond market, in term of the next 12 months will be issuing 300 billion euros in terms of bonds, and somebody has got to buy that. To a certain extent the ECB has not provided its willingness to go all in and so the markets basically say, if you are not willing to go all in, why should we?

ANDERSON: Yes, Bill, but that is not part of its remit, of course. It isn't the lender of last resort, is it? We all know that if the ECB was prepared to, unreservedly back and pledge to those governments that were still solvent that they would ring fence them, that they would buy their bonds, that they would provide this sort of lender of last resort status, then everything would be all right here. But that is not going to happen.

Let me tell you, I'm holding in my hand here, the legislation that ought to be passed by the senate and then the lower house. What it says is that aside from labor reform, which it leaves out, it says that the pensionable age will go to 67, by 2026. It says that organizations will be privatized. What you are telling me tonight, that the whole load of stuff that is in here, that the President Napolitano is really try to effect through really quickly at this point, doesn't make any difference?

GROSS: Well, I think it makes a difference, and let me go to the other side, to your point. I mean, Italy does have a high debt to GDP in terms of sovereign debt, but as the total country, in terms of household and corporate debt, you know, it is perhaps at an average level. So it is not a basket case. The problem has been from an investor standpoint is the obfuscation, the delay, the confusion in terms of what is going forward.

So, this austerity package, yes, you know, if it is implement, if it goes forward, if Italy can balance its budget in the face of slow growth or no growth, potentially a recession, then yes, Italy can ultimately get out of its problem. But at 7 percent yields that exist today, it is going to be a very difficult procedure.

ANDERSON: If you can't convince Bill Gross it is going well, who can you? You know, these are the biggest bond traders in the world, I hope President Napolitano at least is getting his own act together here in Italy and can convince these bond markets are going to be better going forward. Bill, always a pleasure, thank you for very much, indeed, for joining us.

Bill Gross, there, of PIMCO.

Max, it is a tough one for Italy, as I say. The president here, certainly trying to effect some change quickly. It looks as if we are going to see the end of Silvio Berlusconi, within days. But as far as Bill is concerned, and the markets are concerned at this point, that is just not quickly enough, Max.

FOSTER: Amazing. And he really does play into all of this in a big way, Bill Gross. Thank you very much indeed for that.

And a casualty of the crisis as well, in Greece; the prime minister is set to resign as the country waits for a new government, a new leader there. We are live in Athens with the very latest from that crisis country.

(COMMERCIAL BREAK)

FOSTER: Well, he isn't out yet, but it seems George Papandreou's days as Greece's prime minister are numbered. Meetings with the president and other political leaders will continue into Thursday. His office says he will soon tender his resignation. In a televised address Mr. Papandreou told the Greek people that their sacrifices would save the country from bankruptcy.

(BEGIN VIDEO CLIP)

GEORGE PAPANDREOU, GREEK PRIME MINISTER (through translator): Thanks to you, Greece today can still hope and still fight on. I would like to wish every success to the new prime minister. And, of course, to the new government. I'll be next to them. I'll support them with ever sense of mine, with in Greece and abroad.

(END VIDEO CLIP)

FOSTER: Well, there was talk there could be a result today. But politicians are still wrangling to form an interim government and select a new prime minister. Diana Magnay is in Athens with the latest developments.

And you have been watching the twists and turns, Diana, can you make sense of where we are in this crisis?

DIANA MAGNAY, CNN BUSINESS CORRESPONDENT: I certainly have. And we just got another blow to the process, Max. As you heard from the prime minister's speech there, it all sounded so positive, as though the new government and the new leader were determined, that it was all set in stone, that it was just a matter of announcing them. And then the various leaders of the political parties went to the presidential palace, shortly after he made that speech.

And the meeting seemed to collapse. And has been reconvened for Thursday morning; 10 a.m. tomorrow morning, Athens time. So it would appear as though it isn't quite a set in stone as George Papandreou had made out. There is still talk of one particular front-runner, Filippos Petsalnikos; he is the current speaker of the parliament. But perhaps, the opposition isn't quiet so happy, either with him, he is a Pasok member, or with the policies that have to be implemented. Because these talks are still ongoing and we still seem to be very far from the clarity that Europe and the Greek people are demanding.

FOSTER: OK, we'll come back to you -- with you, of course, Diana as we get more on that. The Greek prime minister is going to resign, but we don't know, quite yet.

So in Italy, meanwhile, the prime minister there, Prime Minister Berlusconi, said he won't run for re-elections. So it is a similar story, Berlusconi has agreed to step down, once austerity measures have been pushed through parliament. Italy's president says that a new government will be formed, or elections held, once that happens, Becky is making sense of this story for us.

I guess, Becky, people are talking about who is going to replace Berlusconi, and what do you reckon will happen there?

ANDERSON: Well, I'll tell you what, my betting is on this. That there will be a government of technocrats going forward for a short period of time, that will possibly lead to an election in February or March. The president's own narrative tonight is a little unclear. He said there will either be an election or there will be a coalition government.

My betting, as I say, is that it will be a government of technocrats, and I'll tell you who I think will run that. There is a guy called Mario Monti. I've sat in his lectures at the Perconi (ph) Institute, in Milan, he is absolutely brilliant. He is particularly well respected, not just in Italy, here, but in Europe. He was a European commissioner for a period of time.

Relatively recently, Barroso, he is the ECB president, the European Commission's president, charged him with writing the rules for what will be a new Europe going forward. Got him involved in writing what might be a sort of fiscal, federal set of rules for Europe going forward. And frankly, you can run a monetary union with out a fiscal union, so that is right for all intents and purposes.

This is a guy who is enormously well respected, he is an economist. He's brilliant. Now, tonight, we hear interestingly, that Napolitano, the president here, in Italy, has made him a senator for life. That doesn't necessary mean that the next step is he will be prime minister. But it certainly suggests that Napolitano has got him in mind.

If it is not a government of technocrats, well, then -- the field is wide open. There is a mayor in Florence, who is a young guy. He's particularly good, but he's on the opposition. There are three or four on Berlusconi's side of the fence, who might be made leader of his party. And at an election they may get him. One of them is the chairman of Ferrari at the moment. The guy called Monte Zemuloff (ph), who is a young guy, again. He said recently, here on CNN, that he doesn't particularly want to take on the leadership of the party, anytime soon, but I guess if he were persuaded, then he might.

Berlusconi is going to want an election and believe me, this guy is going nowhere. He may not be the leader of Italy any more, but he certainly still leads his party. He says he won't stand for election again. But he will be working behind the scenes. There is no doubt, to get somebody that he likes, in at the top of his own party, hoping that if there is an election that they will be re-elected to run the government. So the field is wide open at the moment, but keep an eye on Mario Monti tonight. I spoke to him a couple of weeks ago. He wasn't prepared on air to say that he was getting a government of technocrats together, a cabinet as it were. But there is lots and lots of speculation that he has been working on one, recently.

So that is my betting. What about you? What do you think?

FOSTER: Yes, it is going to be a technocrat, isn't it? But I just wondered your thoughts on what Europe is loosing here. Because obviously, Berlusconi, such a colorful character, being lost to European politics, it is a bit of a moment there, isn't it? Replace by a bureaucrat, a complete change?

ANDERSON: Yeah, yeah, he is a really colorful character, isn't he? I'll tell you what I thought was really interesting, Max. For a very long time Italians have said, look they want to see the back of Berlusconi. Berlusconi has made a point, recently, and it was one that he was absolutely sticking to. He said there was nobody else in Italy, who had the statesmanship, the stature that he had on the international stage. And for what it is worth he was much liked, as it were, in the international stage.

But the interesting thing that I saw in Cannes, at the G20 summit, last week, was this: That the body language between Berlusconi and other world leaders, I felt had change at Cannes, last week. So if Berlusconi was hanging on because he felt that he could run Italy for the outside world, as it were; that he had this kind of stature on the international stage, until fairly recently. He may have been right, but I think at G20 last week, he had lost that. And I wonder whether he felt that. And whether he thought that perhaps his days were numbered, here in Italy and that he wouldn't get the sort of support internationally that he has had in the past.

Listen, he turned up at G20 with nothing last week. The Greek prime minister was hauled in front of the G20, you know, he came with a bunch of ideas which didn't go down particularly well. But the G20 leaders were hoping that Berlusconi would come with a plan. He didn't and they were furious about that. There is now a plan. It will go through the senate this weekend. It will go back to the lower house -- I've got it in my hand here -- it lays out what Italy is prepared to do, as far as these austerity measures are concerned. But this, I think is a plan that the president has got his hands on and is really pushing through. And it really isn't Silvio Berlusconi's time, anymore, Max.

FOSTER: OK, it is fascinating stuff and it is still unfolding. Becky, thank you. We'll be back with you later, of course.

Now something Berlusconi knows all too much about it seems, if at first you don't succeed, well, try, try again. A year ago, she came in second. Can Sarah Curran take the top prize this time around at New York's Global Fashion Awards? The boss' big night in the Big Apple is next.

(COMMERCIAL BREAK)

FOSTER: We want to take you to Wall Street now, because the Dow is actually falling quite fast. It is all linked, particularly, to the crisis in Italy. Those bond yields going up. Having a knock on an impact on the whole world, it is a very, very big economy. It is down 3.5 percent currently, the Dow Jones, 430 points. We will keep with it as we head towards the close.

Now, with all the glitz and glamour, there are few greater perks for a boss than an award ceremony, that is until someone else's name gets called up to get the prize though. Sarah Curran, "The Boss" of MyWardrobe.com, had that disappointment last year, in New York. And one year on she is back and she is determined not to come in second place this time. Will she do it? Only one way to find out. It is time for "The Boss".

(BEGIN VIDEOTAPE)

UNIDENTIFIED MALE: Last year, "The Boss":

UNIDENTIFIED FEMALE: And the winner is Ethos (ph).

UNIDENTIFIED MALE: She missed out in 2010, now Sarah Curran returns to New York for a second chance to walk away with the prize.

New York, the city that never sleeps; bright lights and big dreams. Here to live that dream, at least for a few days, is Sarah Curran. The founder and chief executive of MyWardrobe.com.

She is here to attend the global fashion awards. And she is among the nominees. Last year she missed out on the prize. But promised she'd return to pick it up.

SARAH CURRAN, CEO, MYWARDROBE: So, now we go to the after party. And we unwind, we'll get the Global Ann Taylor Award next year.

UNIDENTIFIED MALE: Today, she is hoping the prize is hers for the taking. But before the big event and to help take her mind off the competition she is spending the morning with her son, Jake, and two family friends.

CURRAN: Can we have two pretzels, please.

UNIDENTIFIED MALE: They take in the sights of Times Square and the South Street Seaport, with stunning views of the East River and Lower Manhattan.

CURRAN: Look at the boat, Jake.

UNIDENTIFIED MALE: Finally, as the sun sets on the Big Apple, Sarah gets ready for the big event. Oh, perfect.

Thank you.

UNIDENTIFIED MALE: Dressed to impress, Sarah climbs into her limo and heads off to Midtown Manhattan, where the night's ceremony is already in full swing. As she mingles she sizes up the competition in her category. This year she has been nominated for outstanding customer experience. And this time she is confident it is her name on the trophy.

CURRAN: I'm immensely proud to have got short-listed again for the second year running. I'm up against -- I'm realistic, as well, I'm up against very established brands. So, nothing is a given at all. Well, I think I've got an amazing business. I think I have the best customer experience. Should I win it? Absolutely, damn, yeah.

Hey!

UNIDENTIFIED MALE: At last it is time for the awards to begin.

(INAUDIBLE)

UNIDENTIFIED MALE: And a moment of truth for this boss.

UNIDENTIFIED MALE: Alpha One, Harrod's, Baldwin (ph) Group, Liberty, L. L. Bean, Macy's, (INAUDIBLE), MyWardrobe.com. And the winner is, MyWardrobe.

(APPLAUSE, CHEERS)

CURRAN: See, I told you I would come and get it next year.

UNIDENTIFIED MALE: As the award ceremony wraps up and the guests head out for celebrations elsewhere, Sarah ponders her future, and that of MyWardrobe.

CURRAN: I've taken the business to where it is, which is, you know, mainly U.K., with a global world scope -- with a global kind of view, as well, because we're online and we're open.

But if you're going to take the business to the next level, which is really global, it's going to need a really different skills set.

So for me, I see that as really exciting. And I see it as the real -- the really exciting next step of the business. So you never know, in six months' time, you might have another boss to follow.

UNIDENTIFIED MALE: But that's for the future.

Tonight, it's all about savoring victory.

CURRAN: What's she saying?

UNIDENTIFIED MALE: Next week on The Boss, two bosses, two different ways of recognizing and rewarding your staff. We're in Macao and London. That's next week on The Boss.

(COMMERCIAL BREAK)

ANDERSON: I'm Becky Anderson in Rome.

This is QUEST MEANS BUSINESS.

And this is the breaking news this hour.

Italy's president says parliament will approve a new set of austerity measures within days. And that is important at this point. Prime Minister Silvio Berlusconi will then resign. Investors, though, are showing concern that even a change in leadership won't solve the dire economic problems here.

That's your top news this hour -- Max, with the rest of the headlines.

FOSTER: Becky, the agonizingly slow negotiations in Greece aren't still over. The prime minister, George Papandreou, has delayed his official resignation by at least one more day. We were supposed to find out today just who will replace him. But that's still a mystery. Talks will resume on Thursday morning, we're told.

This demonstration outside headquarters shows clear divisions among Syria's opposition. Protesters attacked a delegation of Syrian opposition fighters, forcing their meeting with the agency's chief to be canceled. These demonstrations are demanding an end to the Syrian regime and they don't want any dialogue.

Russia says it will not support any new sanctions against Iran, despite a new U.N. report suggesting Iran may be developing nuclear weapons. Iran's president calls the report fabrications and it's ruling out any changes to its country's nuclear program, which Iran insists is only for peaceful purposes.

ANDERSON: Well, events have been moving very quickly once again here in Rome. We now learn, in the past couple of hours, that Silvio Berlusconi's premiership will probably be over within days after new austerity measures are voted through both the senate and back in the lower chamber here.

But what is the future for Italy?

What does Italy need to do next in order to convince the markets that it is solvent and that it has a future, and, indeed, convince the people who live here that they have a future, as well?

Well, I asked Pietro Reichlin, who is a professor at the LUISS University here in Rome what his five point plan would be.

I asked him earlier and this is what he said.

(BEGIN VIDEO TAPE)

ANDERSON: If I gave you a blank sheet of paper and said give me your five point plan for Italy, its economy and its future, what would you...

PIETRO REICHLIN, ECONOMICS PROFESSOR, LUISS UNIVERSITY: I would say...

ANDERSON: -- say?

REICHLIN: -- I would say a reform of the tax system, so shifting taxes from labor in firms to property, liberalizing the service sector is very important because Italy lost a lot in terms of competitiveness with respect to Germany and other northern countries. And the cost of services is too high. And making the labor market be more flexible. This is the biggest thing, because, you know, they -- they let -- the inflexibility of the labor market creates a lot of unemployment, a huge unemployment, and also does not allow firms to go -- to get bigger, to -- to -- to exploit economic scale.

ANDERSON: You've given me three. You've got two more.

REICHLIN: OK. So two more. So other things are pensions. We have too many people getting early retirement. This is not going to be a problem in the long run, because there has been already reform on the pension system that was good, but too low, too slow in -- in taking place.

And, well, the other thing that everybody is talking about, the cost of institutional -- public institutions, politics is too high. We must cap these costs.

(END VIDEO TAPE)

FOSTER: Well, across the world, key players are speaking out about the European crisis. Today, German Chancellor Angela Merkel said that Europe's plight is now so unpleasant, that deep structural reforms are needed, reform -- reaffirming her stance that nobody will be leaving the Eurozone, the chancellor said that will mean more Europe, not less Europe.

IMF managing director, Christine Lagarde, says she believes the world economy has entered a dangerous and uncertain new phase. She warns that adverse feedback loops between the real economy and the financial sector have become permanent.

Vanessa Rossi is the economic adviser to the Oxford Analytical Consulting Group.

And she's here -- here with us now.

How much should the rest of the world be worrying about what's going on in the Eurozone, well, in Italy, really?

VANESSA ROSSI, ECONOMICS ADVISER TO OXFORD ANALYTICS: Well, I think the Eurozone has to worry very much about what's going on. And that's clearly what's happening at the present time.

I -- I've been a persistent critic, over many years, of various problems that were going underlying the political gloss in the Eurozone, all of the backslapping that went on with the tenth birthday party of the euro, for example.

And this was at the time when the economies were already crumbling. It's not been addressed.

Having said that, I now am turning more optimistic that finally, they are getting to grips with the problems that they did not want to treat before. We can see a much tougher game being played in Europe. Leaders are being pushed out. Policies are being pushed in. Change is being pushed in.

And I think that actually means that we could be not at a tipping point down, but almost at the beginning of a new renaissance here for some of these economies.

The difficulty for Italy, and I'm sorry, but I think that has to be absolutely number one here, is not the economy, because that will take time to regenerate. It's the debt problem. You have to get the finances in here. And that's where the rest of Europe has to act with it.

FOSTER: If you look at Ireland or Greece or Portugal, they get their -- they got their bailouts within six months of hitting above this 7 percent tipping point that we've been talking about. So people are suggesting that might be the case with Italy, as well.

But now, where's -- where on earth is that money going to come from for the -- for a bailout for Italy?

ROSSI: Well, do remember that what Italy is doing is (INAUDIBLE) itself in the way that it has up until now in the markets. And so...

FOSTER: But it can't do that now.

ROSSI: -- money is there. But money is there. Now, it doesn't want to start taking money at 7 percent. If you carry on doing that, it will become, eventually, unsustainable, not over a short-term period, but over a longer-term.

So what is the solution in the next few weeks?

We've seen these efforts on the political front. This is to make a stronger package that the rest of the Eurozone leadership can (INAUDIBLE).

FOSTER: But where is the money going to come from?

Europe?

ROSSI: And the rest of the money will probably have to come through some form of assistance from the rest of Europe. But...

FOSTER: So Germany?

ROSSI: I think primarily, of course, it's what we mean by Eurozone now. And it's...

FOSTER: Germany.

ROSSI: -- from Germany and, of course, there's a few other partners which are still strong -- the Netherlands, Austria and so on.

FOSTER: But have they got the money...

ROSSI: But the big one has to be Germany.

FOSTER: -- to spend to bailout the fourth -- third largest economy in the zone?

ROSSI: In terms of the next year's plan and how much the EFSF could raise. Remember, if it -- if it's now being able to expand further, it can cope with this, certainly, over the next year. And in the Italian situation, if you can cope with this to the tune of around 300 billion euros over the coming year, you can probably come out the other side.

But the critical issue here is going to be gaining confidence. And you have to make the financial markets your friend, not your enemy, in this. And the EFSF, so far, has had quite a slow, somewhat difficult start.

Probably, this means you're going to have to wheel out the ECB somewhere at the back of this if you want to get this funding situation immediately resolved. And Italy's economy can wait a little bit. The financing situation absolutely cannot wait. And that's where it comes back to your first question about the rest of the world if you enter a period of total financial turmoil, then it's going to make everyone else's economies that much more difficult to manage.

FOSTER: And do you like the idea of bureaucrats replacing these colorful leaders in these troubled countries?

ROSSI: Well, you have actually seen today comments that Berlusconi is only some figurehead for this. I mean effectively, the problem is still there. The debt problem is, the economic problem, whoever you put in charge.

However, I think the feeling is that you need someone who will pay far more attention to this economic detail. And I'm sorry for politicians, but economics comes back and bites you if you don't get it right. And that's the key message that you now will have in Europe.

FOSTER: OK. Let's listen to -- from a key European figure. We just had some sound coming from Jose Manuel Barroso.

So let's hear what he had to say.

(BEGIN VIDEO CLIP)

JOSE MANUEL BARROSO, PRESIDENT, EUROPEAN COMMISSION: And if you Europe, wants to play its role in this new world, our member states must realize that they do not have the power or influence to do so alone.

(END VIDEO CLIP)

FOSTER: He -- has he got a key role here or is it just national politics now?

ROSSI: Well, but they have to still hang together here. I think they all, they -- they have all decided they have to stay with the euro. Frankly, I also think it makes sense. I don't think Italy's problem is the euro per se. It's the fact that it started out life in the euro with debt at more or less 120 percent of GDP. It worked like crazy for the pretty -- for the past 10 years. To get debt down to less than 100, now, because of the economic crisis in the last few years, it's back at 120 percent.

It's 120 percent of GDP debt that's the real killer here.

FOSTER: OK. Vanessa Rossi, thank you very much, as ever, for joining us.

ROSSI: Thank you.

FOSTER: Ford is fighting back against high fuel prices. It's just -- in just a moment, CEO Alan Mulally tells me why he thinks the new EcoBoost engine is a -- is a game-changer when it comes to efficiency.

(COMMERCIAL BREAK)

FOSTER: Brent crude prices have fallen to under $113 a barrel, down around 2.75 of a dollar from Tuesday's settling price. The International Energy Agency says prices could, though, hit $150 over the next few years. But if energy investment in the Middle East and North Africa comes in third below the required $100 billion a year between now and 2015, the agency also warns that we're looking ourselves into -- well, we're actually locking ourselves into an unsustainable energy future. And the report released today, lots of work went into it. It says government -- the governments need to introduce stronger incentives to drive investment in efficient and low carbon technologies.

The agency expects global energy demand to increase by a third by 2035. And it sees non-renewable fossil fuels meeting 75 percent of that demand.

And the IAE's deputy executive director told me how he sees the problem shaping up.

(BEGIN VIDEOTAPE)

RICHARD JONES, IAE DEPUTY EXECUTIVE DIRECTOR: It's not a question of a problem with the resources, it's the question of using the resources, because if -- if the resources are used, the carbon dioxide gets into the atmosphere, it takes hundreds of years for it to get out of the atmosphere. And then it creates the glob -- the greenhouse effect and global warming.

And what we're saying is that basically, unless we have some kind of action, real action, by 2017, we won't be able to prevent global warming.

FOSTER: Give us a sense of how -- how many cars. For example, will they be in the future and what sort of pressure will that (INAUDIBLE)?

JONES: Well, we're talking about doubling the -- the stock of cars in the world by 2035, 20 -- basically, the next 25 years.

FOSTER: Double the number of cars in just that period?

JONES: Yes. Yes. And this is primarily the growth in private transportation, public tran -- or, yes -- in China and India. Those are two huge markets that are basically untapped. They're going to be -- their -- their middle class is expanding rapidly. Right now, they get around on scooters or in very primitive vehicles. And they're going to be moving increasingly into proper -- proper cars in the next 25 years. And there's no reason they shouldn't do that. It's to expected.

But if they start -- if they consume the same kind of gasoline per mile that we do, and -- and potentially, they might even be worse, because they may not have the same standards, that's going to be a tremendous increase in emissions.

But it's really -- it's really the increase in electricity demand that -- that fuels global warming.

FOSTER: But in that period up to 2035, as you say, technology would have improved massively, as well, and efficiency...

JONES: Yes.

FOSTER: -- of engines, for example.

JONES: Yes.

FOSTER: So they could be using the same amount of fossil fuels for a great many more people.

JONES: Absolutely. But -- but all of those known technologal -- technological improvements are built into our -- our models and our projections.

FOSTER: So it's pretty grim.

JONES: So, yes. We -- we have a -- a -- a percentage improvement for energy efficiency built into the -- to the -- these projections. It's very grim.

FOSTER: And are there any suggestions, in terms of cars, for example, about an alternative which is realistic, because there doesn't seem to be a realistic alternative to petroleum right now.

JONES: No, but that's one of the reasons why, for security proposes, we advocate a variety of technologies, including electric vehicles, plug-in hybrid vehicles for transport, but also decarbonization of the power sector. Renewable energy, nuclear weapon, using carbon capture and storage if you want to burn coal and other fossil fuels.

(END VIDEO TAPE)

FOSTER: Well, the IAE says fuel-efficiency in non-hybrid petrol and diesel cars could improve 40 percent by 2035. Ford says it's already half way there, though.

Well, the company's Cologne engine plant today, it launched its new EcoBoost engine, which it says is it's most fuel-efficient yet. For will be rolling out the engines across its range of cars and vans next year, but says customers will benefit from cheaper fuel bills while also reducing CO2 emissions.

I spoke to Ford's CEO, Alan Mulally, earlier. I told -- well, he told me what makes this new engine so different.

(BEGIN VIDEOTAPE)

ALAN MULALLY, PRESIDENT & CEO, FORD: This technology includes direct fuel injection, the big change and twin variable cam design technology. So we're going to be able to deliver the most fuel-efficiency. We'll have tremendous improvement in fuel mileage and a reduction in CO2. And because of our scale worldwide in this new factory, we're going to be able to offer it most affordably in all of the Ford vehicles going forward.

FOSTER: But the U.K. standard, I think, is miles per gallon. But give us a sense of how far this engine could potentially take a -- a smaller car?

MULALLY: Oh, I think the way to think of it is that it will go in different sized vehicles, which the miles per gallon are dependent on are the CO2. And so you're -- you're going to be able to see anywhere from a 15 to 20 percent improvement in efficiency no matter what the size vehicle.

FOSTER: In terms of fuel-efficiency, is this quite a recent development, that customers are coming into the showrooms and saying that's actually a priority?

MULALLY: Well, in Europe, it has been a long tradition, because, you know, with the cost of fuel, both petrol and diesel, fuel-efficiency has been a very important part of the purchase decision. Now, clearly, in the Americas and also in Asia-Pacific, with the price of fuel gradually increasing, it has now, like Europe, because a reason to buy.

FOSTER: What sorts of cars will this engine go into?

What will they look like?

Is there anything particularly we should look forward to there?

MULALLY: Well, I think that what you're starting to see now from Ford are -- is really a -- a viewpoint of the future. So you look at the new Fiesta, which people love the way it looks, the way it -- the way you feel when you sit in it, the driving dynamics, the quality, the fit and finish, as well as the quality of the fuel-efficiency and the safety and the technology. And with Ford, because of our scale, we can provide that with -- with the best affordability.

So the Fiesta, the Focus, the new Mondeo, the new Cougar, the S-Max, the C-Max, all of that family of vehicle now are going to have this enabling technology that the customers really do want and value.

FOSTER: You've mentioned the Fiesta and the Focus. I know that you've been under some pressure from analysts and some of the trade press about some reliability problems in those cars.

Have you addressed them yet?

MULALLY: Yes, we have. And -- and the issue specifically, where we're associated with the introduction of the new Sync My Ford technology, it allows you to be seamlessly connected to the Internet with voice- activated commands with your hands on the wheel and your eyes on the road.

You know, we got some great feedback from the customers about how to simplify that and make it a little bit more intuitive, which we are now incorporating in the vehicles going forward.

And we also had some great customer feedback on the shifting dynamics of our new fuel-efficient, six feet transmissions. So that's a software change on the algorithms to have it shift a little bit differently, the way the customers want. So we have that improvement identified and we're incorporating that in the product line going forward.

But I think you're going to see that from us, going forward, that we're going to continue to lead on the technology that people want. We're also going to be even more responsive about incorporating their suggestions for improvement.

FOSTER: It's interesting trying to get the balance right though, isn't it, because this technology was almost too good, too clever, a bit ahead of it's time.

You've had to simplify it down, haven't you?

MULALLY: Well, I think that's a really important point, because the cars are moving with the consumer electronics pace. And as that moves along, we are designing our cars to be able to move into the consumer electronics space, but also have the vehicles so that you can absolutely reduce the distraction and even be a better driver.

(END VIDEOTAPE)

FOSTER: Well, there you are, the -- the head of Ford, of course, speaking to me earlier.

U.S. markets are down sharply this hour. We'll be live at the New York Stock Exchange after the break for the very latest on that for you.

(COMMERCIAL BREAK)

FOSTER: Now, in the last hour or so, the Dow has actually been falling quite sharply. So we want to take you to the stock exchange and speak to Alison, who's going to explain this one for us -- Alison.

ALISON KOSIK, CNN BUSINESS CORRESPONDENT: Hi, Max.

Yes, we watched the selling accelerate after a report came out from Reuters saying that Eurozone officials said they have no plans for a financial rescue package for Italy, basically saying financial assistance for Italy is not in the cards. And that's why you saw the Dow really tank. Right now, is down 372 points.

The thinking is that Italy is just too big to bailout at this point. You know, and a good part of it is bailout fatigue on the part of Germany and France, which have essentially been underwriting a lot of these bailouts.

You know, Italy is sitting on its own debt load here, $2.5 trillion of debt.

But the big worry for the markets is where does this leave Italy?

If there's no financial assistance, if there's no economic plan, their government is in question, where -- what does this leave for Italy?

What does this mean for the markets?

Your seeing that fear really tear into the markets right now. The VIX, that's the fear index, that measures the level of uncertainty, the level of volatility and fear, that spiked 30 percent -- Max.

FOSTER: Whoa.

So what's going on in terms of U.S. or corporate news?

Anything else playing into it or is it all about Italy?

KOSIK: It really is all about Italy. You know, we got some auto sales numbers today that were pretty good, but not good enough. Not good enough to inspire any buying.

I think, you know, Italy has really taken center stage. It's pushed Greece out of the way. And Italy is a big player. And Wall Street knows that.

And until -- until some sort of concrete solution is made in Italy, I think you're going to see volatility come back into the markets in a very, very big way -- Max.

FOSTER: OK, Alison, thank you very much.

We are getting the latest for you from Italy. If you're an investor, you're obviously worried. We'll be live there in Rome with Becky after the break.

(COMMERCIAL BREAK)

FOSTER: Well, in the last hour, we've seen the world's biggest stock market in Wall Street tank on concerns the Italian economy may need to be bailed out, but there isn't enough money to do it. So all eyes in the world, it seems, on Rome today.

We're going to go there now and speak to Becky -- Becky.

ANDERSON: Yes, if I was a trader, Max, tonight, I think I'd buy on this dip, you know?

I might be getting ahead of myself, but certainly the president here in Italy, not the prime minister, that's Silvio Berlusconi, of course, but the president, has really taken this crisis by the horns. We now have a bill that will go through the senate and back to the lower house at the weekend. And we will see the resignation, we are told, of -- of the prime minister, Silvio Berlusconi, by the beginning of next week.

Everything is now coming together here in Italy. But it has been absolute chaos. And that has been reflected on the financial markets with the -- the cost of borrowing going above that 7 percent threshold, which is seen by many as unsustainable.

As I say, I've just got this sense now that things are beginning to take shape. Traders might not agree with me and you might see these European markets selloff again tomorrow. But as I say, just watch this, because I think there might be a possibility of a buy on the dip at this stage.

Listen, CONNECT THE WORLD is coming up in an hour from now. We've got a lot more on this Italian situation and, indeed, on what is going on in Greece. It's been a good day there, as well, as far as the news is concerned.

But for me and Max, for the time being on QUEST MEANS BUSINESS, it is a very good evening.

The news follows this.

END